Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Apple Didn't Learn From Netflix's Mistake

The consumer tech giant is rolling ads into App Store, but not all that glitters is sold.

Apple(NASDAQ:AAPL) is shaking up its App Store. Phil Schiller -- Apple's senior vice president of worldwide marketing -- gave an interview to The Verge ahead of next week's WWDC powwow. He dropped a couple of bombshells, but the one I want to delve into is Apple's decision to start accepting ads on searches through its iconic marketplace.

The appeal is obvious. There are now 1.5 million iOS apps vying for attention on the App Store. It's hard to get noticed. You also have a situation where two-thirds of all downloads originate from a search query. The public is used to sifting through paid search results for the sake of free searches, a model championed by Google and earlier engines. There's clearly a lot of money that well-funded but customer-ignored developers will be willing to spend for a top spot in App Store search result pages, but is it the best move for Apple?

Let's take a step back to go over a company -- Netflix(NASDAQ:NFLX) -- that once thought it had fertile soil for generating incremental ad revenue. It could offer Apple an important lesson that it may not want to ignore.

Black mailer

Netflix is no longer seen primarily as a DVD lender. That business peaked in 2010 when it had roughly 20 million subscribers. It's down to fewer than 5 million disc-based accounts today. However, a decade ago, it was still growing the number of optical discs it was sending out in signature red mailers, and that's when it decide to start letting sponsors place ads on its mailers.

Why not, it figured at the time. It was already paying to mail out its DVDs in paper envelopes. If someone was coming out with a new movie or had a product that couch potatoes would crave why not go the direct mail route, hopping on Netflix's flap tails in the process.

It was certainly odd to see those red DVD envelopes promote a movie that would be months away from Netflix availability. It was even stranger to see those same mailers turn green to promote Shrek 2. However, it was found money for Netflix.

It didn't last. Netflix went on to quietly discontinue its mailers as a marketing platform. CEO Reed Hastings told me back in 2009 -- shortly after Netflix had decided to move on -- that the revenue generated was "pretty inconsequential" to its overall business. It decided to focus on using that space primarily to promote in-house initiatives if it were to use it at all.

Hastings never specifically said that accepting ads would cheapen the brand, but staying away from being a platform for third-party marketing has been a hallmark of its service. One of the big reasons for the popularity of its streaming hub is that the content is played without any ads. Netflix's website and streaming app are also free of marketing spots. Netflix may be leaving money on the table, but its reputation is solely within its control.

Now it's true that Apple stands to make a lot more by accepting paid search spots on its App Store than Netflix ever could have selling print ads on its disc envelopes. However, Apple's a brand that folks pay up for, and with that markup comes the expectation that they're not going to be nickel-and-dimed along the way. Most people associate premium products and platforms as ad-free experiences. That's about to change for Apple's App Store -- and it may be something that it comes to regret.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Rick Munarriz owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Apple, and Netflix. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
Follow @market